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UkrSib BNP Paribas - Ukraine places UAH 734 mn during bond auction, demand is highly segmented - May 19, 2010.

The euro-zone debt crisis continues to derail the economic recovery in Europe and destabilizing world markets. The European policy makers fail to calm down investors with a a[logical not]750bn rescue plan and find themselves running out of weapons in their arsenal to stop the contagion. In an unprecedented intervention step the ECB bought a[logical not]16.5bn in bonds to inject liquidity, but investors hardly believe it will be enough to pull the euro-zone's weakest links out of the debt crisis.

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On Tuesday, following the EU ministers' announcement that the austerity measures are strictly confined to high public deficit countries and will not affect the entire Euro-region, the euro recovered peaking at 1.2445/USD. However, the currency hit a fresh four year low trading at 1.2143 against the dollar early on Wednesday, on the news of German ban on naked short selling and speculation on European government bonds. The euro's decline had also raised fears for the Chinese exporters as the currency plunged against the yuan to an eight year low, weakening the competitiveness of Chinese companies in its largest export market.

The gold has eased on Tuesday, reaching 1,206.60/oz (the lowest since 11 May), as investors sought to realize gains of last week's impressive rally (recent record level of near $1,250/oz). Oil slipped on Tuesday to a five month low trading at above $67.90/barrel on concerns of weak US and European demand.

Ukrainian Eurobonds yesterday dropped slightly, with Ukraine-13 and Ukraine-16 closing at 7.018 (-0.163) and 8.231 (-0.067) respectively. We remain neutral on Ukrainian external debt given prevailing negative sentiment.

Ukraine managed to raise UAH 734mn at the yesterday's auction with the bulk of the funds coming from the issue of Euro-2012 3 year bonds (UAH 707mn). The Euro-2012 series bonds are used to channel the proceeds into projects linked to the preparation of 2012 Football Championship, and receive special treatment from Ukraine's central bank by allowing the commercial banks to use these bonds to form their mandatory reserves. Recently NBU has issued a regulation allowing Ukrainian banks to form 100% of the reserves requirements using Euro-2012 bonds.

The government was offering 6m, 1y, 3y, 5y and 3y (Euro-2012), with investors expressing demand primarily for the short end of the curve (UAH 731mn at par) and for aspeciala bonds. While there was still healthy demand for 1y (UAH 554mn), regular 3y and 5y bonds received merely UAH 120mn and UAH 250mn worth of bids. The cutoff rates landed at minimum bids, sending strong signal that the government is looking to cut borrowing costs even further. We expect the primary market to remain focused on either short-term securities or Euro-2012 bonds.

Secondary T-bills market saw little change with average bids at 10.5-11.5% for short-term OVDP and 12.5-13.5 for medium-term.

UkrSibbank BNP Paribas

04070, Kyiv, vul. Illinska, 8

tel. +380 44 537-50-74, 537 50 56

www.bnpparibas.com

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Publication:Russian Banks and Brokers Reports
Date:May 19, 2010
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